Finance: Eurodollar Stampede

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A rush to borrow abroad seemed perfectly predictable after President Johnson, in his New Year's Day package of balance of payments restrictions, prohibited U.S. companies from sending dollars overseas for investment in Western Europe. Still, it came as a surprise to financiers on both sides of the Atlantic that the rush for Eurodollars—U.S. dollars already in foreign hands—expanded into a wild stampede.

So far this year, U.S. corporations have floated or announced $443 million of bond issues abroad, all denominated in dollars—which meant that they could be bought only with Eurodollars. The total approaches the $497 million worth of bonds that U.S. firms sold in Europe during all of 1966; it is only a fifth less than the $527 million they sold all last year. The surge of American offerings has impelled several European borrowers to postpone their own Eurobond issues.

Understandable Error. The end is nowhere in sight. Last week a European subsidiary of International Telephone and Telegraph floated a $50 million issue. Honeywell was devising final terms for a $30 million offering to be sold later in the month, and National Biscuit Co. also announced a $30 million issue. Underwriters predict that U.S. companies will soon announce plans to sell as much as another $200 million worth. "People have been flabbergasted by the volume," says Zurich Banker Hans J. Bär.

The $15 billion Eurodollar pool, fed by 17 years of U.S. balance of payments deficits, is deposited mostly in European banks or foreign branches of U.S. banks. Its funds flow freely from one country to another; there is no official bookkeeping, and no one can be sure how many Eurodollars are currently available for investment. But when they are available, they can be invested anywhere in any amount without interference by any government.

Climbing Rates. This year's spurt of borrowing has already driven interest rates up by ½%, to 7¼% for ordinary Eurobonds. To keep rates from climbing higher, some European central banks have been feeding dollars into the private market. U.S. corporate borrowers have kept the interest bite down to 5% by making their offerings eligible for later conversion to common stock. Though conversions dilute the value of shares owned by existing stockholders, the 2% difference in interest could mean a $6,000,000 saving over the 20-year life of $30 million of bonds.

Continental bondmen fear that Washington will soon clamp down on convertible issues. Many European investors, they report, are simply selling their American stocks to raise cash to buy such bonds. Such sales siphon dollars abroad, and the U.S. can ill afford the extra drain on its balance of payments.